Every month Dorothy Ratz of Bloomington, Ind., gets one or two checks in the mail. In October, for example, there was an official-looking envelope from Philip Morris. November belongs to AT&T, Bell Atlantic and BellSouth. In December, she’ll find checks from Kmart and Eli Lilly. Then in January she’ll get a check from Philip Morris, just as she did in October.
Most dividend-paying companies distribute payments to their stockholders on a quarterly basis. So it’s possible to construct, as Ratz has, a portfolio of stocks that pays monthly dividends on a staggered schedule, not unlike the regular salary she received when she worked as a schoolteacher. “It’s fun,” says Ratz. “It’s like getting a paycheck.”
“It’s like putting a puzzle together,” adds Carol Lippman, an analyst for the brokerage firm A.G. Edwards & Sons in St. Louis, who specializes in dividend income from stocks. A puzzle it may well be, but finding the solution can be rewarding indeed.
The key is identifying strong companies with a history of dividend increases and the financial health to deliver more of the same. Those regular dividend increases, in turn, help push up a stock’s selling price. Investors are rewarded over time with a nifty combination of dividend income and stock-price appreciation. That total return should be a prime consideration for investors.
How to get a good dividend payer? Forget stocks with unusually high yields. Such companies are often troubled ones whose stock prices have been driven down as a result. They may be cutting those dividends in the future.
Recently, for example, electric utilities yielded in the 6 to 7 percent range. “If you find an electric stock with a 9 percent yield, the company’s in trouble,” says James Stratton, who runs the Stratton Monthly Dividend Shares fund. “Don’t look for the highest dividend yield. Look for high yields, but not the highest.”
A good point of comparison, says Lippman, is the 30-year U.S. Treasury bond yield, recently 6 percent. If investors figure that dividend yield is similar to a fixed-income investment such as a bond and that more speculative returns should come through stock-price appreciation, then the long Treasury bond yield might serve as a good guide.
That’s true of common stocks, by the way, but stock look-alikes such as real estate investment trusts (REITs) play by slightly different rules than common stocks do and distribute essentially all of their income to investors. Therefore, they can pay higher dividends without necessarily being suspect.
Most publicly traded stocks with a stable dividend history pay shareholders on a quarterly basis. Nynex, for example, pays dividends in February, May, August and November.
You can get payment dates and per-share amounts from your broker, from Value Line Investment Survey at many libraries and from stock tables in the weekly newspaper Barron’s. Then you can build a portfolio of stocks that taken together delivers consistent monthly income.
Lippman recommends including at least nine stocks in your monthly-dividend portfolio, which should result in three checks per month. Studies have shown that acquiring that amount of individual stocks provides sufficient diversification, which helps reduce risk for ordinary individual portfolios.
It is, of course, a challenge to find nine companies that pay dividends in roughly equal monthly amounts because stock prices and yields vary widely. One way around this problem is to skip receiving checks and arrange to have all your dividend income automatically deposited into a brokerage money-market account.
Then, assuming you have a bit of padding in your account balance, you can write yourself a monthly check on your dividend earnings based on the average income per month.
A simple, no-sweat way to get regular dividend income, along with the expertise of a professional stock picker, is by investing in Stratton Monthly Dividend Shares (800-441-6580). As its name implies, this fund pays dividends monthly. Its recent 30-day yield was above average for stock funds for the past 1, 3, 5 and 10 years, but with barely two-thirds the volatility of the typical fund.
To illustrate how a check-a-month plan could be constructed, we asked Lippman and Stratton to suggest portfolios of dividend-paying stocks designed to deliver both income and capital appreciation over time. All these stocks trade on the New York Stock Exchange.
Lippman’s picks:
– January, April, July and October. Automatic Data Processing (recent price about $53, yield 1 percent); H.J. Heinz (about $38, 3.5 percent); Philip Morris (about $53, 5 percent)
– February, May, August and November. Nynex (about $43, 5.5 percent); Sysco (about $29, 1 percent); WICOR (about $31, 5 percent).
– March, June, September and December. Emerson Electric (about $58, 2.5 percent); Florida Progress (about $35, 5.5 percent); NationsBank (about $46, 3.6 percent).
Lippman’s suggested portfolio is drawn from longtime dividend payers picked by A.G. Edwards analysts to maintain payouts in the future. Overall, figure on a 9.9 percent annual dividend growth rate.
Stratton characterizes his picks as “very conservative and very high yield.” Total return for the group, he says, should be about 13 percent a year-half from dividend income and half from appreciation.
– January, April, July and October. Long Island Lighting (about $26, 7 percent); Texas Utilities (about $45, 6.9 percent); Rochester Gas & Electric (about $28, 6.2 percent).
– February, May, August and November. Central Hudson Gas & Electric (about $32, 6.5 percent); Meditrust (about $34, 7.6 percent); Public Service of Colorado (about $30, 6.7 percent).
– March, June, September and December. Public Service Enterprise Group (about $34, 6.4 percent); FPL Group (about $40, 6.2 percent); Potomac Electric Power (about $28, 5.9 percent).
A final note: The selections in these sample portfolios are not set-and-forget stocks. Stratton’s portfolio turnover is about 30 percent a year. Expect to revise your own portfolio of dividend payers on an annual basis.
